GOOD READ: The real effects of debt

The BIS published this interesting paper on the cancer that debt is. When is debt excessive?

  • At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging. When does the level of debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the threshold is in the range of 80 to 100% of GDP.
  • Over the past 30 years, summing these three sectors together (household, corporate, and government), the ratio of debt to GDP in advanced economies has risen relentlessly from 165% in 1980 to 310% today, or by an average of more than 5 percentage points of GDP per year over the last three decades. Given current policies and demographics, it is difficult to see this trend reversing any time soon. Should we be worried? What are the real consequences of such rapid increase in debt levels? When does debt bite?
  • Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the number is in the range of 80 to 100% of GDP. For corporate debt, the threshold is closer to 90%. And for household debt, we report a threshold of around 85% of GDP, although the impact is very imprecisely estimated.

A few charts from the paper:

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